Lending Rate Likely to Plunge?

 

When the interest rate reduction is one of top concerns of the State Bank of Vietnam, commercial lenders seem to be ignorant of this. What they need is a reasonable margin of deposit and lending rates, enough for an operating profit. While capital source is a headache for banks and most of mobilised capital is short-termed and comes from the open market or wholesale banking (borrowing and lending amongst banks in the interbank market), they of course have weak response to the rate cut direction of the Government and the State Bank.

 

However, with a message from the central bank governor and the market dominance of big lenders on the Vietnamese monetary market, interest rates are envisaged to go down. A lower interest rate not only benefits borrowers but also reduces pressures on banks themselves, helping them avoid capital attracting races and ease loaning risks. With the support of the State Bank and particularly the high consensus of commercial banks, a cut in interest rates in VND deposits and loans will be made in early July.

 

The interest rates tend to ease in the past two months on the back of the guidance of the Government and the SBV. Companies operating in agricultural production and in rural areas, exporters and small and medium businesses have enjoyed lower borrowing rates than others. Notably, Vietcombank and BIDV have offered an interest of some 12 % per annum to these borrowers. Vietinbank, Agribank and Mekong Housing Bank (MHB) fixed at 12.5 % while commercial joint stock banks set at some 13 %. Lending rates for other borrowers were also cut 0.5-1 % in June in comparison with that in May.

 

According to the interest rate plan, large-scaled lenders, mainly State-owned, will reduce the lending rate to 12-12.5 % per annum for the three groups of priority borrowers while joint stock commercial banks will try to reach this goal in the shortest time. The Hochiminh Stock Exchange-listed Vietinbank is considered a pioneer in cutting the rate as it took action immediately the consensus amongst lenders was reached. This bank announced to apply the new interest rate policy from July 1. Accordingly, companies operating in agriculture and rural areas, exporters and small and medium-sized businesses will be subjected at most 12.5 % per annum for their loans in the local dong. However, exporters must pledge to sell foreign currencies to Vietinbank to enjoy the preferential rate.

 

Banks also agreed to lower interest rates for VND deposits from the current 11.5 % per annum to 11 % in nearly July and 10.2-10.5 % in late September 2010.

 

Governor Nguyen Van Giau said the SBV will continue to use its tools to regulate the interest rate toward the downward trend. He requested commercial banks not to offer promotions and gifts as this action will increase the real level of deposit rates.

 

The interest rate on the interbank market has stayed high for a long time and some big banks have earned a wide margin when they re-lend smaller lenders. The State Bank of Vietnam (SBV) will not compromise commercial banks borrowing on the interbank market to re-lend their customers because this bears risks and affects the system safety. At a press briefing in late June 2010, Governor Nguyen Van Giau pointed out that in early 2010, interbank borrowing at 15 banks was equal to 50 % or higher of its capital mobilisation from the public but the rate has currently been reduced to only 21 % on average, a narrow margin from the statutory 20 % provided by the SBV.

 

The SBV has adopted strong measures, including State Bank’s loans for banks to settle interbank borrowings, to attain the above result. Agribank - the largest lender in Vietnam by assets - was reported to cut its interbank borrowing from VND27,000 billion to just over VND9,000 billion.

 

However, several commercial lenders have dodged the law by providing the money for their subsidiaries to put it into other banks at a high deposit rate of 11.5 % per annum. This is potentially risky to the system because most deposits are short-term, usually of a few weeks.

 

The interest rate cut is a hard work because the deposit rate is standing at high level, causing a narrow margin of input and output. Risks will increase when banks use short-term deposits for long-term loans.